Flood insurance: Get it before you're soggy

Hurricane Sandy flooding

We see it every year. Tens of thousands of homes wrecked by record floods no one thought possible.

We see families leaving their homes in rowboats, paddling along what used to be their street. Sometimes only housetops are peeking through high water left by torrential rains.

How many of those victims protected the equity in their homes with flood insurance? And how many faced big financial losses because they didn't?

The fact is, most homeowners only get flood insurance if their mortgage companies force them to buy it.

But you don't have to have a creek running through your backyard or live right on the coast to be at risk.

Every year thousands of families are shocked not only that such a catastrophe could happen to them but that their regular homeowner's policy doesn't cover flood damage.

No one's does. You need special government-backed insurance that you can't rush out and buy at the last minute.

Unlike other policies, flood insurance doesn't start protecting us right away. There's a 30-day waiting period.

"People generally ask about flood insurance only when they are worried," says insurance agent Evan Evans in Bakersfield, Calif. "There used to be a five-day waiting period, but people were holding off buying it until the water was actually rising."

Checking the flood risk for your home -- or one you're about to buy -- takes less than a minute on a government Web site.

Just click on "How can I get covered?" and then enter an address, city, state and ZIP code.

Flood insurance can be a good investment even if your risk is judged as low or moderate, because 25% of claims come from low-to-moderate risk areas. As the Web site warns: "Floods can happen anytime, anywhere -- even an inch of water can cause serious damage to your property."

Flood policies for those areas are not terribly expensive, usually less than 0.1% of a home's value. So you could expect a $300,000 house to cost less than $300 a year to insure.

But most homeowners who buy insurance through the federal government's National Flood Insurance Program only do so because they live in high-risk areas, right on the ocean or in a flood plain, and can't get a mortgage without it.

"When lenders require it for a home loan, that's when most people get it," Evans says. "I normally don't see people wanting to buy it just because of a concern."

That concern doesn't normally begin until there's a flood and people find out that their homeowner's insurance policy does not cover flood damage.

"A typical homeowner's policy, will cover water damage that originates from inside the home or from a hole in the roof. That is water damage," Evans says. "If the water touches the surface of the ground and then enters the home, it will not help you. Then it is a flood. A general homeowner's policy was never designed to give coverage from surface water damage, from a flood."

A flood, Evans adds, is "a general and temporary condition of two or more acres of normally dry land. It also has to affect two or more properties that are connected."

What happens, however, when a hurricane lifts off the roof of the house and it rains inside the house? You can have both water damage and a flood. Leave that one to the lawyers and the government to settle, but don't hold your breath while you wait for that settlement to be reached.

It is important to realize that the flood insurance a lender requires only covers the structure, Evans adds. "You need separate flood insurance for contents, but most people buy only what they are required to buy. They do not insure the contents."

If you do get flood insurance, it normally comes with a $500 deductible, he says. Your premium will depend on where your house is. Some floodplains are more likely to flood than others. The height of your house is also a factor. If your house is above the floodplain height, you can get a better rate. This doesn't mean that your neighborhood won't flood, just that your house is less likely to be inundated than those at a lower elevation.

Evans points out that the number of times that a flood claim has been filed on the house is also a factor. If two or more claims have been filed on the house over the years -- regardless of who owned the house -- you could still get flood insurance, but you will pay more.

The Federal Emergency Management Agency sets the rates for flood insurance. The fact that it keeps premiums artificially low for flood-prone areas -- it does, no one denies it -- has been widely questioned. Critics say that encourages all sorts of construction in places that just don't make sense.

They also point to federal studies that show that since 1978 -- nearly three decades before Hurricane Katrina struck New Orleans -- three states were regularly getting nearly half of all the money the flood insurance claims: Louisiana, Florida and Texas. The flood insurance claim for Katrina alone was $25 billion, and nearly half the people affected by the hurricane did not even have flood insurance.

The political debate over flood insurance will probably continue. While politicians, bureaucrats, lawyers and lobbyists can afford to take their time, homeowners can't. Insurance is all about risk. How much are you willing to take? Lenders do not like risk. That's why they so regularly require flood insurance.

Lenders are also better protected and have a much bigger cushion to fall back on than most of us do. For them, a house is merely a piece of property, a physical structure that returns income on their investment. If absolute worse comes to absolute worst, it would be a tax write-off.

What would happen if a flood wiped out your home and everything in it? Would it be just a tax write-off? Or, is there more at stake?